Merger Monday Is Making a Slow Comeback

by Dan Burrows | November 12, 2012 1:38 pm

OK, so it’s way too soon to proclaim the return of Merger Monday, but a recent flurry of deal activity has to give the market hope — especially considering that the value of mergers and acquisitions has hit its lowest point since depths of the financial crisis three years ago.

Monday’s are traditionally the biggest day for companies to announce major deals, and for the first time in ages, this week didn’t disappoint. Leucadia National (NYSE:LUK[1]), a holding company with assets ranging from beef processing to casinos, said it’s buying investment bank and brokerage Jefferies Group (NYSE:JEF[2]) in a deal valued at $3.7 billion. Additionally, Sherwin-Williams (NYSE:SHW[3]), the giant paint company, announced a $2.3 billion deal to buy Comex Group, a coatings maker based in Mexico.

Those Monday M&A moves follow some other well-regarded deals struck at the end of last week. For example, Precision Castparts (NYSE:PCP[4]), which casts high-tech precision materials for everything from jet engines to artificial joints, said late Friday it’s buying Titanium Metals (NYSE:TIE[5]) for $2.9 billion.

And that news came hard on the heels of Priceline‘s (NASDAQ:PCLN[6]) announcement that it would buy rival travel site[7] Kayak Software (NASDAQ:KYAK[8]) for $1.8 billion.

No, the latest deal news doesn’t mean M&A is back with a vengeance. Far from it. But it does raise the chances for the market (not to mention for investment banking and legal advisers) that the deals business has bottomed out.

Traders loves M&A activity because it takes shares out of circulation, often by replacing them with cash, and usually by paying a hefty premium to market prices. Furthermore, M&A often spurs more deal activity, either because competitors feel like they need to strike their own deals to compete or because regulators insist on some divestiture of assets in exchange for approval, which puts even more assets in play.

And goodness knows it’s been a dismal year for deals. The total value of global M&A activity dropped 19% through the first three quarters of 2012 versus the year-ago period, according to data from Thomson Reuters. That decline was led by a 19% drop in the Americas and a retreat of 21% in Europe. Indeed, M&A hasn’t been this weak since the third quarter of 2009 — the very bottom of the financial crisis — according to Bloomberg data.

That’s despite companies being better capitalized than at probably anytime in history. After all, corporations are sitting on all-time record levels of cash[9], while borrowing costs in the bond market have never been lower.

Partly that has to be a function of the fact that the stock market is back at pre-crisis levels (making deals relatively expensive), while global growth continues to sputter. Why should any company pay a premium to a 2007- or 2008-level share price when the outlook for earnings growth is deteriorating amid a European recession and a Chinese economy struggling to grow at 7.5% this year?

So, whether this latest uptick in M&A is sustainable is, of course, a big question, especially since the final quarter of the year usually sees a jump in deals.

But the activity is welcome, nonetheless, and might just indicate that the deals drought is coming to an end. As we noted recently, some sectors — notably, energy — are practically begging for further consolidation[10]. That should help support valuations and share prices.

As of this writing, Dan Burrows did not hold positions in any of the aforementioned securities.